Variable Cost: How to Calculate it? 2022 Brilliant Guide!

by | Jun 25, 2022

We understand that running a business in Mississauga is stressful. Also, it’s essential to know your variable cost. Moreover, it’s not always easy to understand how much these costs will increase with the number of units produced. But knowing some numbers and why they’re important can help keep your business on track. So, we are here to guide you in the process of variable costs.

Also, you must look into your bookkeeping records from time to time. This will help you figure out your variable costs and simplify things for you! As we know, bookkeeping enhances the chances of success in your business. So, if you find trouble updating your bookkeeping, Yogi & Associates are here to help you! We offer affordable, effective, and accurate bookkeeping services.

1. What is a Variable Cost?

It is an expense that rises and falls based on the volume of your production or sales. Variable costs are items, such as labor and raw materials, that you buy to create the number of goods or services customers demand. These expenses will change when you produce more goods or perform more services.

The following are some examples of standard variable costs:

  • Costs of labor
  • Supplies of raw materials
  • Essentials of machinery
  • Facilities
  • Costs of shipping
  • Fees charged by credit cards on purchases made by customers
  • Commissions on selling
  • Marketing

2. Importance of Variable Costs:

Following are the points that explains the importance of variable costs:

  1. You can make informed decisions on the type of goods and services you produce. You’ll understand these costs better. 
  2. Variable expenses include the cost of materials and labor that can be increased or decreased by altering production.
  3. These costs help investors understand how well a company handles different operating conditions. Also, you can use this information to identify areas of opportunity for cost reduction.

3. How to Calculate Variable Costs?

Calculating these costs helps understanding the operation of a business. Moreover, you can assess the following with this information:

  • What is the profit margin on the product or service?
  • Whether or you should keep making it?
  • Where can you make changes to lower the variable expenses of that product or service?
  • How should you price your goods or services?
  • Variable costs are computed by multiplying the price per unit of output by the production quantity.

4. The Formula of Variable Cost:

The  formula might look strange at first, but it is very simple to use! So, for calculation, you will take the amount it costs to make one unit of your product. Then, multiply that by the total number of products you’ve created.

Total Variable Costs = Cost Per Unit x Total Number of Units.

5. Five Easy Steps to Calculate Variable Costs:

To calculate the total variable price of producing one product or service, you must identify all costs related to production and add them together. There are five steps to take:

  1. First, learn about the five general elements of cost.
  2. Then identify each element related to production.
  3. Determine how much a particular commodity, product, or service costs.
  4. Next, add all variable costs until you have a total amount.
  5. Then multiply that amount by the number of units created using the previous step.

For Example:

Suppose you’re making a gadget and want to know how much it will cost to make 200. So, the following variable expenses are involved with the production of each widget:

  • $2.00 per gadget in labor costs
  • $1.00 per gadget in material costs
  • $0.50 per gadget in packaging costs
  • $0.50 per gadget for shipping
  • $0.50 per gadget for device upkeep

$2.00 + $1.00 + $0.50 + $0.50 + $0.50 = $3.50 per widget is the variable cost of production. This implies that each widget will cost $3.50 to produce.

The total number of widgets produced is 200.

6. Break-Even Analysis:

The break-even analysis allows you to know if your business will break even or make a profit. It will help you determine whether it’s worth continuing. To calculate, you should know each of the costs from your business, along with your target cost. To do this, we’ll use the following equations:

1. Per Unit

Break-even point = fixed costs ÷ (revenue per unit – variable cost per unit)

2. Based on Sales Dollars:

Break-even point = fixed costs ÷ contribution margin

3. Contribution Margin

Contribution Margin = Product Price – Variable Costs

Watch this short video to understand the main concepts covered in this guide.

Learn about variable mortgage rates, see our article What is Variable Mortgage Rate: An Authentic Guide 2022!

7. Organize your Bookkeeping Records:

There’s more to bookkeeping than numbers and calculations. So, it would help you check your bookkeeping records regularly to be aware of your variable costs. This will help you determine whether your variable price is too high or too low.

If you want any help updating your bookkeeping records, find a reliable bookkeeping service in Mississauga. We can offer strategic advice on managing your finances by giving our bookkeeping services. So, if you want to get better insight into your business costs, contact Yogi & Associates today!

The Bottom Line!

Understanding variable costs is an essential accounting concept to ensure you are profitable. But this is a complex problem if you don’t have the right team helping you manage it. Yogi & Associates can help your business to stay successful beneath rising these costs. Also, we can provide bookkeeping services if you want help updating your books. So, call us today!

Contact Yogi & Associates!